Tuesday 15 October 2013 08.54 EDT
First published on Tuesday 15 October 2013 08.54 EDT

Beijing will give London-based institutions the right to invest directly into China using the yuan, George Osborne has announced, giving the City an edge over other financial centres fighting for business.

Investors will be able to apply for licences to buy Chinese stocks and bonds – rather than having to go via Hong Kong – with an initial quota of 80bn yuan (£8.2bn), under the extension of the Renminbi Qualified Financial Institutional Investor scheme.

Chinese banks will also be able to apply to open wholesale branches in Britain, rather than using tightly regulated subsidiaries – encouraging them to expand their activity in the UK.

"Today we agreed the next big step in making London – already the global centre for finance – a major global centre for trading and investing the Chinese currency too," the chancellor told reporters at a briefing in Beijing on Tuesday after talks with the Chinese vice-premier Ma Kai.

"More trade and more investment means more business and more jobs for Britain."

The UK and China have also agreed to allow direct trading between sterling and the yuan, rather than via the dollar. The pound will become the fourth currency to trade directly with the yuan, following the US and Australian dollars and the yen, though it is unclear when trading will begin.

China is seeking to internationalise its currency, but is treading cautiously due to fears over volatility. The UK is already a global hub for trading other currencies.

Britain accounts for 62% of yuan trading outside China and Hong Kong. Daily trade in London has risen to around $5bn (£3.1bn) since it began last year.

Chinese banks have been pushing hard for the right to open branches and several warned the Treasury last year that they were moving much of their business to Luxembourg because of the restrictions imposed by their subsidiary status.

The new arrangements will allow them to deal with companies and financial institutions, but not individual customers. Branch status allows them to draw on the capital of their main operations; the hope is that they will be able to invest more in the UK.

"Like all investments they have to be done in an open and transparent way, but we have seen investment already in London's water supply and Heathrow airport and we have found China to be very straightforward partners in investment. Equally, there is a huge amount of British investment in China."

Mark Henderson, chairman of the London Luxury Quarter, said the new procedures could give an enormous boost to the fortunes of British retailers. Chinese tourists spent £262m across Mayfair, Piccadilly and St James's in 2012, a 32% increase year-on-year. But at present Britain gets only 200,000 of the two million Chinese who visit Europe annually.